'Budget 2012-Neither too cruel, nor too kind'

The finance minister, in the middle of his speech, said "I must be cruel, only to be kind", quoting Hamlet.

Whatever he meant, various listeners interpreted it in their own way.

The reform optimists thought that he would be cruel to the consensus and cautious crowd, and really spring radical reforms.

In the other corner were the pessimists, who didn't expect too many reforms, and who interpreted the "cruelty" to mean more social-sector spending, more taxes, more deficits.

As it turned out, the FM was neither too cruel nor too kind.

There were no harsh announcements, the kind that fiscal hawks and economists like.

So no ruthless cutting of subsidies, no drastic cuts in taxes, and no big-bang reform. This was what was actually anticipated by the crowd which had asked the FM to make the most of this penultimate budget, before the 2014 campaign hits.

Surely they know by now that central governments are forever in ballot mode?

In a television interview about fiscal affairs, the FM was asked whether he was ready to bite the bullet. In a Freudian twist, he heard it as "bite the ballot".

So much for electoral matters weighing on everything, whether the Railway or the Union Budget.

The macro context to this budget was that industrial growth was low, and private capital spending had ground to a halt.

Delays in clearances, fuel linkages, and scam-induced caution and inertia had all contributed to this state of affairs.

The Economic Survey admitted that what was required was reviving investment sentiment.

But how?

The specific measures in the Budget were: a doubling of incentives for R&D spending, some accelerated depreciation, allowance for on-the-job training of workers.

All welcome, but not carrying any big punch.

If industrial growth starts recovering eventually, it may not be due to these factors alone.

Among the various parameters that the Bank measures, two stand out starkly.

These are (a) approvals and clearances; and (b) enforcement of contracts.

There is not much that a Budget can do to improve the government's score on these, unless you have proper single-window mechanisms and judicial reforms. But those are the kinds of things that will put India on the path of increasing its share of manufacturing GDP from the current 16 per cent to the aspired 25 per cent.

Investor sentiment was sought to be tickled alive with infrastructure push.

The FM reiterated his government's commitment to ensuring a flow of $1 trillion over the next five years in power, roads, bridges and even telecom. Of this, half will have to come from the private sector.

That's a very tall order, but hopefully liquidity-drenched foreign investors will come knocking.

To

facilitate that, a slew of financial sector reforms were announced. Many of these financial sector bills are to be tabled (and passed) in this Budget session itself.

It looks likely that insurance and pension funds will start flowing into the stock market.

The infrastructure bond quota has been doubled too.

If the economy has held up just below 7 per cent growth, it is thanks to consumer spending, especially from rural areas.

This year foodgrain production is at an all time high, and even the cotton crop is booming.

Much of this is not happenstance.

Over the years the UPA's focus on the rural and agricultural economy had paid off. Whether it is through social-sector spending on health, education, nutrition, skill-building, or the NREGA (which is proxy unemployment insurance), all has built rural purchasing power.

Added to that is the continuing credit flow into agriculture (albeit some of it in the form of loan waivers in the past).

So this year, too, we have a hefty increase in agricultural credit, helped further by capital infusion into rural banks and NABARD.

So this is catering to UPA's rural base, and that was proforma UPA budgeting.

The second theme of this budget (the first being growth revival) was fiscal consolidation.

Last year's fiscal slippage is almost entirely attributed to oil prices (manifesting through higher fertiliser prices, and unviable diesel prices at the retail level).

It is quite obvious that next year, too, oil prices will remain high.

If you do not remove the huge gap between petrol and diesel prices, it looks implausible.

Most of the subsidy of Rs 1 lakh crore (Rs 1 trfor fertiliser goes to foreign producers, since one third of fertiliser is imported.

Since the subsidy is meant only for small farmers, whose consumption is limited by their landholding size, it is not clear why more aggressive targeting is not attempted.

There is also a case for a quantitative rationing of fertiliser, a la six LPG cylinders for urban families.

So a 5.1 per cent fiscal deficit seems like a difficult target, unless growth picks up strongly.

Of course the FM has two major sources of non-tax revenues next year: disinvestment, which will depend on the mood of local and global stock markets.

And the 2G auction, which needs to be rushed through before next March.

Hamlet's famous line of being cruel so that he could be kind were to his mother, so that she may not lapse further into sensuality, and reach the point of no return.

The FM is no absolute monarch like Hamlet, so he could only serve a milder version of the mix of kindness and harshness. In the end, it was pragmatism, perseverance, patience, persistence, and lot of detailed work.